While today’s blog has an initial focus for those affected by the recent Supreme Courts DOMA decision, the tax implications discussed apply to all married couples that file their federal return as Married Filing Joint.
Same-Sex Married Couples may have enjoyed life together for years, but 2013 will be the first U.S. tax year that these couples have to consider “filing married “. How will this affect their personal finances or even the their personal financial liability?
Perhaps, because filing married was never a possibility for filing Federal Taxes there was not a clear and driving need for discussion. Now there is.
Consider this quote from the Prudential LGBT Financial Experience 2012-2013 Research Study: “Same-Sex Couples value financial independence far more than the general population, often keeping separate accounts and financial plans.”
With the overturn of certain parts of DOMA (Defense of Marriage Act), it will be harder to keep money in the closet.
One of my personal goals is to help people make smart financial decisions and to avoid expensive mistakes. A good method for doing this is to look at both the risks and the rewards of each possible action.
This blog will focus on some of the risks for “filing married”. In my next blog, I will discuss the difference between Married Filing Joint (MFJ) and Married Filing Separate (MFS).
Married Filing Joint (MFJ) requires that both spouses sign the tax return. Note that doing so can result in the following as per the 2012 1040 U.S. Individual Tax Return Instructions:
Joint and several tax liability. If you file a joint return, both you and your spouse are generally responsible for the tax and interest or penalties due on the return. This means that if one spouse does not pay the tax due, the other may have to. Or, if one spouse does not report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS.
You may want to file separately if:
You believe your spouse is not reporting all of his or her income, or
You do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does not pay enough estimated tax.
Relief from joint responsibility: In some cases, one spouse may be relieved of joint responsibility for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. You can ask for relief no matter how small the liability.
There are three types of relief available:
Innocent spouse relief
Separation of liability (available only to joint filers who are divorced, widowed, legally separated, or who have not lived together for the 12 months ending on the date the election for this relief is filed).
You must file Form 8857, Request for Innocent Spouse Relief, to request relief from joint responsibility. Publication 971, Innocent Spouse Relief, explains the kinds of relief and who may qualify for them.
On August 8, 2013, The IRS issued REG-132251-11. This proposes to expand from two to 10 years the amount of time that taxpayers could apply for Innocent Spouse Relief so they are no longer responsible for the tax debts of estranged spouses.
In closing, I understand that the “Joint & Several Liability” may come as a surprise to many and it should. Many are newly married for U.S. tax purposes. I chose to share the “risks” first because it will help keep the “rewards” in perspective.